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Kansas City Southern's (KCS) first-quarter financials look pretty much like those posted by its Class I competitors: Revenues continued to lag right along with the limping economy, and increases in net income and net earnings weren't enough to offset higher operating expenses.

For the quarter ended March 31, KCS reported a $1.9 million increase in net income to $13.6 million, compared with $11.7 million for the same 2002 period. First-quarter net income included a one-time favorable benefit of $8.9 million relating to the cumulative effect arising from a required change in the method of accounting for removal costs of certain track structure assets. The quarter also included a $5.2 million decline in income tax expense and a $2.1 million increase in equity in net earnings from KCS' investment in TFM S.A. de C.V.

But the gains were offset by a $6.6 million decline in operating income, a $3.1 million decrease in other income and a $0.2 million increase in interest expense quarter to quarter. In first-quarter 2000, KCS recorded a one-time, $4.4 million gain by selling its ownership interest in Mexrail Inc. to TFM S.A. de C.V. Mexrail wholly owns the Texas Mexican Railway Co. (Tex Mex).

For the quarter, KCS recorded revenue of $140.2 million, a 2.6 percent decline compared with first-quarter 2002's $143.9 million. Revenues for KCS' principal operating subsidiary, Kansas City Southern Railway Co. (KCSR), declined $2.9 million compared with the same 2002 period.

KCS' consolidated operating ratio ballooned to 95.1, compared with 90.7 for the same period a year ago.

"We have been encouraged by signs of economic growth in certain commodity segments during the first three months of 2003," said Michael Haverty, KCS chairman, president and chief executive officer, in a prepared statement. "Overall revenues, however, continued to be unfavorably impacted by the uncertain economy while first-quarter operating expenses were negatively affected, primarily by higher fuel costs."

But KCS officials expect to record efficiency gains — and, they hope, corresponding revenue boosts — later this year as the railroad's computerized Management Control System (MCS) operating platform provides "increased accessorial revenues and a reduction in costs" through further reductions in car-hire expenses as operating personnel are "better able to leverage the benefits of this system," Haverty said.

In first-quarter 2004, KCS plans to launch MCS on TFM, which continues to be "the most profitable segment" of KCS' business, he added.

"We are very excited about the long-term growth prospects of this rail franchise as evidenced by the recent announcement to place KCSR, Tex Mex and TFM under the common control of a single transportation holding company, NAFTA Rail," Haverty said.

On April 21, KCS and Grupo TMM S.A. de C.V. announced a series of agreements under which KCSR, Tex Mex and TFM would be commonly controlled by NAFTA Rail, a new Kansas City, Mo.-based holding company whose shares would trade on the New York Stock Exchange.

Under the proposed transactions — which are subject to shareholders, and U.S. and Mexican regulator approval — Grupo TMM subsidiary TMM Multimodal would receive 18 million shares (or 22 percent) of NAFTA Rail, $200 million cash and a potential incentive payment between $100 million and $180 million based on the outcome of TFM's appeal of the Mexican government's January decision to deny the railroad a value-added tax refund of $206 million. NAFTA Rail would obtain a 38.4 percent ownership stake in TFM and 51 percent stake in Tex Mex owner Mexrail Inc.

On April 28, KCS announced it had received its bank group's blessing to complete the transactions. Led by JPMorgan Chase Bank, the group approved NAFTA Rail investment in further equity interests in TFM, and in equity interests representing 51 percent of Mexrail's issued and outstanding capital stock; and use of KCS cash to acquire Mexrail.